UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

  x Quarterly REPORT PURSUANT to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2020

 

or

 

  ¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  

 

For the transaction period from _____________ to _____________

 

Commission File No. 333-62216

 

HEALTH DISCOVERY CORPORATION

(Exact name of registrant as specified in its charter)

 

Georgia 74-3002154
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   

2002 Summit Blvd, NE

Suite 300

Atlanta, Georgia

 

 

30319

(Address of principal executive offices) (Zip Code)

 

(404) 566-4865
(Registrant’s telephone number, including area code)

 

 

 

(Former name, former address and former fiscal year,

if changed since the last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common HDVY NA

 

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 
Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ¨  Accelerated Filer ¨  
Non-accelerated Filer x  Smaller Reporting Company x  
    Emerging growth Company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

 

Class: Outstanding as of June 30, 2020
   
Common Stock, no par value 404,044,937
   
Series A Preferred Stock 0
   
Series B Preferred Stock 0
   
Series C Preferred Stock 0
   
Series D Preferred Stock 20,991,891

 

Note Regarding Reliance on SEC Order

 

As result of the global outbreak of the COVID-19 virus, on May 13, 2020 the Company evaluated its ongoing effort to prepare and file its quarterly report on Form 10-Q for the quarter ended March 31, 2020. Certain Company officers and management as well as professional staff and consultants were then unable to conduct work required to prepare our quarterly report for the quarter ended March 31, 2020.

 

As a result, the Company was unable to compile and review certain information required in order to permit the Company to file a timely and accurate quarterly report on Form 10-Q for its quarter ended March 31, 2020 by the prescribed date without unreasonable effort or expense due to circumstances related to COVID-19.

 

On March 25, 2020 the Securities and Exchange Commission (the “SEC”) issued an Order under Section 36 (Release No. 34-88465) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), granting exemptions from specified provisions of the Exchange Act and certain rules thereunder, as modified by Order issued by the SEC on March 25, 2020 (Release No. 34-88465, the “Order”). The Order provides that a registrant (as defined in Exchange Act Rule 12b-2) subject to the reporting requirements of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such a registrant, is exempt from any requirement to file or furnish materials with the Commission under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable, where certain conditions are satisfied.

 

The Company relied on this Order for filing of its quarterly report on Form 10-Q for the quarter ended March 31, 2020.

 

 

 

 

 

TABLE OF CONTENTS

 

 

PART I  -- FINANCIAL INFORMATION 2
   
  Item 1.  Unaudited Financial Statements 2
     
    Balance Sheets 2
       
    Statements of Operations 3
       
    Statements of Cash Flows 4
       
    Notes to Financial Statements 5
       
  Item 2.  Managements's Discussion and Analysis of Financial Condition and Results of Operations 13
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk 17
     
  Item 4.  Controls and Procedures 17
     
PART II -- OTHER INFORMATION 18
   
  Item 1.  Legal Proceedings 18
     
  Item 1A. Risk Factors 19
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 19
     
  Item 3.  Defaults Upon Senior Securities 20
     
  Item 4.  Mine Safety Disclosures 20
     
  Item 5.  Other Information 20
     
  Item 6.  Exhibits 20
     
SIGNATURES 20

 

i

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HEALTH DISCOVERY CORPORATION

 

Balance Sheets

(unaudited)

 

Assets   March 31,     December 31,  
    2020     2019  
Current Assets                
    Cash   $ 2,155,978     $ 2,295,720  
    Legal fee retainer     16,626       16,796  
                 
          Total Current Assets     2,172,604       2,312,516  
                 
Patents, Less Accumulated Amortization of $3,985,794, as of March 31, 2020 and December 31, 2019     -       -  
                 
          Total Assets   $ 2,172,604     $ 2,312,516  
                 
Liabilities and Stockholders' Equity                
                 
Current Liabilities                
     Accounts Payable   $ 29,107     $ 21,483  
     Accrued Wages     462,500       440,089  
     Accrued Liabilities (Note I)     152,000       -  
     Dividends Payable     206,637       206,637  
     Accrued Interest     -       16,688  
     Common Stock Warrants Liability (Note G)     3,092,223       1,898,126  
     Convertible Debt (Note H)     -       200,000  
                 
           Total Current Liabilities     3,942,467       2,783,023  
                 
           Total Liabilities     3,942,467       2,783,023  
                 
Stockholders' Equity                
                 
    Preferred Stock, Convertible, No Par Value 45,000,000 Shares Authorized; 20,991,891 Issued and Outstanding March 31, 2020 and 0 Issued and Outstanding December 31, 2019     216,688       -  
                 
Common Stock, No Par Value, 450,000,000 Shares Authorized; 388,646,386 Shares Issued and Outstanding March 31, 2020 and December 31, 2019     28,909,761       28,909,761  
                 
   Accumulated Deficit     (30,896,312 )     (29,380,268 )
                 
          Total Stockholders' Deficit     (1,769,863 )     (470,507 )
                 
          Total Liabilities and Stockholders' Deficit   $ 2,172,604     $ 2,312,516  

 

See accompanying notes to financial statements.

 

 2

 

 

HEALTH DISCOVERY CORPORATION

 

Statements of Operations

(unaudited)

 

For the Three Months Ended March 31, 2020 and 2019

 

    2020     2019  
Revenues:                
     Licensing and Development   $ -     $ 10,847  
      Total Revenue     -       10,847  
Operating Expenses:                
     Amortization     -       65,680  
     Professional and Consulting Fees     24,672       2,133  
     Legal Fees (Note I)     152,170       6,474  
     Compensation     106,114       73,318  
     Other General and Administrative Expenses     39,425       30,121  
        Total Operating Expenses     322,381       177,726  
                 
     Loss From Operations     (322,381 )     (166,879 )
                 
Other Income (Expense)                
    Interest Income     434       -  
    Interest Expense     -       (10,000 )
    Other Expense - Change in Warrant Liability (Note G)     (1,194,097 )     -  
        Total Other Expense   (1,193,663 )   (10,000 )
Net Loss   $ (1,516,044 )   $ (176,879 )
                 
Preferred Stock Dividends   $ -     $ -  
                 
Loss Attributable to Common Stockholders   $ (1,516,044 )   $ (176,879 )
                 
Weighted Average Outstanding Shares (basic and diluted)     388,646,386       271,718,989  
                 
Net Loss Per Share (basic and diluted)   $ (0.0039 )   $ (0.0007 )

  

See accompanying notes to financial statements.

 

 3

 

 

HEALTH DISCOVERY CORPORATION

 

Statements of Cash Flows

(unaudited)

 

For the Three Months Ended March 31, 2020 and 2019

 

    2020     2019  
Cash Flows From Operating Activities                
Net Loss   $ (1,516,044 )   $ (176,879 )
Adjustments to Reconcile Net Loss to Net Cash                
Used in Operating Activities:                
Amortization     -       65,680  
Stock-based Compensation for Directors     -       3,308  
Increase in Accounts Payable     7,624       551  
Increase in Accrued Wages     22,411       42,461  
Increase in Accrued Liabilities     152,000       -  
Increase in Accrued Interest     -       10,000  
Increase in Warrant Liability     1,194,097       -  
(Decrease) in Deferred Revenue     -       (10,846 )
Decrease in Legal Fee Retainer     170       -  
Net Cash Used in Operating Activities     (139,742 )     (65,725 )
                 
Cash Flows From Financing Activities:                
    Proceeds from Convertible Debt - Principal     -       92,940  
Net Cash Provided by Financing Activities     -       92,940  
                 
Net (Decrease) Increase in Cash     (139,742 )     27,215  
                 
Cash, at Beginning of Period     2,295,720       67  
                 
Cash, at End of Period   $ 2,155,978     $ 27,282  

 

See accompanying notes to financial statements.

 

 4

 

 

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited)

Note A - BASIS OF PRESENTATION

 

Health Discovery Corporation (“HDC” or the “Company”) is a machine learning company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools. HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.

 

Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that may play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our Support Vector Machines (“SVM”) assets in particular have broad applicability in many other fields. Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.

 

Our Company’s principal asset is its intellectual property, which includes advanced mathematical algorithms called SVM, as well as biomarkers that we discovered by applying our SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by 31 patents that have been issued or are currently pending around the world.

 

Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities. In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies. Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop diagnostic and prognostic predictive tests; licensing of the SVM technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise. 

 

The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP). In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from those estimates.

 

The interim financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2020 are not necessarily indicative of the results of a full year’s operations and should be read in conjunction with the financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2019.

 

Note B – SIGNIFICANT ACCOUNTING POLICIES

 

Stock-based Compensation

 

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.

 

Valuation and Amortization Method – The fair value awards of stock that do not contain a market condition target are estimated on the grant date using the Black-Scholes option-pricing model. The fair value of options that contain a market condition, such as a specified hurdle price, is estimated on the grant date using a probability weighted fair value model similar to a lattice valuation model.  Both the Black-Scholes and the probability weighted valuation models require assumptions and estimates of expected volatility, expected life, expected dividend yield and expected risk-free interest rates.

 

Expected Term – The expected term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and forfeitures due to departure prior to the end of the vesting schedule.  

  

 5

 

 

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited) , continued

 

Note B – SIGNIFICANT ACCOUNTING POLICIES, continued

 

Expected Volatility – Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility, employing a prior period equivalent to the expected term to estimate expected volatility

 

Risk-Free Interest Rate – The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.

 

Note C - NET LOSS PER SHARE

 

Basic Earnings Per Share (“EPS”) includes no dilution and is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity. Due to the net loss in all periods presented, potentially dilutive shares are not included in the calculation of diluted EPS as those shares would create an anti-dilutive result.

 

Note D - STOCK-BASED COMPENSATION and other EQUITY BASED PAYMENTS

 

Stock-based expense included in our net loss for the three months ended March 31, 2020 consisted of $0 for stock options granted to employees and directors. Stock-based expense included in our net loss for the three months ended March 31, 2019 was $3,308 for stock options granted to employees and directors. As of March 31, 2020, there was $0 of unrecognized cost related to stock option grants. 

 

The aggregate intrinsic value of all options and warrants outstanding and exercisable as of March 31, 2020 was $304,000, based on the market closing price of $0.027 on March 31, 2020, less exercise prices.

 

As of March 31, 2020, there were 158,358,781 option and warrant shares outstanding. The following schedule summarizes combined stock option and warrant information as of December 31, 2019 and March 31, 2020.

 

Number of Warrants and Options Issued   Period Ended
December 31, 2019
    Weighted
Average
Exercise
Price
    Period Ended
March 31, 2020
    Weighted
Average
Exercise
Price
 
Outstanding beginning of period     108,375,000     $ -       116,375,000     $ -  
Granted     8,000,000     $ 0.070       41,983,781     $ 0.029  
Exercised     -     $ -       -     $ -  
Forfeited     -     $ -       -     $ -  
Expired un-exercised     -     $ -       -     $ -  
Outstanding end of the period     116,375,000               158,358,781          

 

The following table reflects stock-based compensation and expense recorded for the periods ended March 31, 2020 and March 31, 2019:

 

    2020     2019  
Director and consultant option expenses   $ -     $ 3,308  
Employee option expenses     -       -  
Total stock compensation expenses   $ -     $ 3,308  

 

 6

 

 

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited) , continued

 

Note E - PATENTS

 

The Company has acquired and developed a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery. Initial costs paid to purchase patents are capitalized and amortized using the straight-line method over the remaining life of the patent. The Company has fully amortized the cost of the patents and patent related costs of $3,985,794, at March 31, 2020.

 

Amortization charged to operations for the three months ended March 31, 2020 and 2019 was $0 and $65,680, respectively. As the patents have been fully amortized since July 2019, there is no further estimated amortization expense expected.

 

Note F – STOCKHOLDERS’ EQUITY

 

Series C Preferred Stock

 

In the fourth quarter of 2013, the Board of Directors authorized the issuance of Series C Preferred Shares in private placement transactions. As of December 31, 2014, and 2015, the Company had issued a total of 6,640,000 and 30,000,000 preferred shares, respectively. The Series C Preferred Shares were fully subscribed in the third quarter 2015. The Company received total net proceeds of $900,000, of which $568,000 was received during the year ended December 31, 2015. The Series C Preferred Shares are accompanied by $0.03 warrants and $0.03 contingency warrants. The contingency warrants were to be issued only if the Company had not attained profitability by the end of the first quarter 2016. Because the Company did not attain profitability by the end of first quarter 2016, the contingency warrants were issued. The warrant holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days.  The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days.  The warrants were valued at $0.022 each using the Black Scholes Method.

 

The Series C Preferred Stock were to be converted into common stock of the Company at the option of the holder, without the payment of additional consideration by the holder. The Shares of Series C Preferred Stock must be converted into common stock of the Company either by the demand by the shareholder or at the fifth anniversary of the date of issuance. During the period ended March 31, 2019, the Series C Preferred Stock was converted to common stock of the Company.

 

Series D Preferred Stock

 

On April 22, 2019 the Company issued a convertible promissory note (the “Additional Promissory Note”) in the amount of $200,000 to George H. McGovern, III, the Chairman and CEO of the Company, and James Dengler, a Company shareholder (the “Note Holders”) for funds advanced to the Company. The Additional Promissory Note was approved by the Board on August 1, 2018. Funds were advanced to the Company from August 1, 2018 through March 13, 2019. The Additional Promissory Note was executed on April 22, 2019 by the Company. The Additional Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Additional Promissory Note into Series D Preferred Stock (“Preferred Stock”) of the Company at a conversion price based upon the price of the Company’s common stock on the date of advancement of the loan amount (the “Conversion Price”). Because the loan proceeds were advanced on multiple dates, the Conversion Price varies depending upon the price of the Company’s common stock on the date of advancement of the loan amount. The right of conversion (“Optional Conversion”) is solely at the Note Holders’ discretion.

 

On December 31, 2019, the Note Holders notified the Company of their election to convert the Additional Promissory Note into Series D Preferred Stock. As a result, the Note Holders received 20,991,891 shares of Series D Preferred Stock on February 10, 2020. Because of this conversion, the Company recognized a change in Stockholder Equity during the period ended March 31, 2020. Specifically, the Company recognized an increase of $216,688 in Preferred Stock expense.

 

Additionally, the Note Holders retain two warrants to purchase Common Stock of the Company for each share of Preferred Stock held and the price of each warrant is equal to the Conversion Price. Each warrant shall expire on July 31, 2029. These additional warrants account for 41,983,781 shares at an average weighted price of $0.029.

 

Common Stock

 

During the third quarter of 2015, the Board of Directors authorized the issuance of common stock in a private placement of 7,000,000 shares with certain warrant features. As of December 31, 2015, 4,000,000 shares of this offering were sold, and the Company received proceeds of $120,000. The shares are accompanied by $0.03 warrants and $0.06 contingency warrants. The contingency warrants were to be issued only if the Company had not attained profitability by the end of the first quarter 2016. Because the Company did not attain profitability by the end of first quarter 2016, the contingency warrants were issued. The warrant holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days.  The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days.  The warrants were valued at $0.022 each using the Black Scholes Method.

 

 7

 

 

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited), continued

 

Note F - STOCKHOLDERS’ EQUITY, continued

 

On October 23, 2017, the Company issued a convertible promissory note (the “Promissory Note”) to the Note Holders, for $300,000. The Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Promissory Note into the Company’s common stock (“Common Stock”) at a conversion price of $0.004.

 

On December 31, 2019, the Note Holders notified the Company of their election to convert the Promissory Note into Common Stock. As a result, the Note Holders received 86,927,397 shares of Common Stock on December 31, 2019.

 

All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.

 

Due to the warrant features that accompany the sale of the Company’s preferred and common shares, if all outstanding options and warrants were exercised, the Company would not have sufficient shares of common stock to meet the exercised options. The aggregate intrinsic value of all options and warrants outstanding and exercisable prices. The Company will need to increase the authorized shares of common stock in order to satisfy the options and warrants if the holders exercise the outstanding options and warrants.

 

Note G – COMMON STOCK WARRANT LIABILITY

 

In the event the number of shares or warrants of Common Stock granted exceeds the number of shares available if the holders exercised all of the previously issued outstanding options and warrants, the Company accounts for this excess as a Common Stock Warrant Liability, which is adjusted to fair value at the end of each reporting period. If and when the Company authorizes sufficient shares of common stock and preferred stock, the Common Stock Warrant Liability is reclassified to equity at the fair value of the liability at the date of reclassification.

 

On December 31, 2019, as more fully disclosed in Note H, the Note Holders converted the Promissory Notes into 86,927,397 shares of Common Stock, thereby causing the Company to again exceed its authorized number of shares of Common Stock to be issued. Accordingly, the Company reclassified $1,898,126 from stockholders’ equity to common stock warrants liability as of December 31, 2019.

 

The common stock warrants liability is recorded based upon the number of warrants which exceed the number of common shares available to meet the exercised options and warrants using the Black-Scholes option-pricing model. Due to the warrant features that accompany the sale of the Company’s preferred and common shares, if all outstanding options and warrants were exercised, the Company would not have sufficient shares of common stock to meet the exercised options. The Company will need to increase the authorized shares of common stock in order to satisfy the options and warrants if the holders exercise the outstanding options and warrants.

 

Because the Company issued warrants exceeding the amount of common shares available if the holders exercised the previously issued outstanding options and warrants, the Company has recorded an increase in the common stock warrants liability of $1,194,097 during the three month period ended March 31, 2020.

 

Note H – CONVERTIBLE DEBT

 

$300,000 Promissory Note

 

On October 23, 2017, the Company issued a Promissory Note to the Note Holders, for $300,000. The Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Promissory Note into Common Stock at a conversion price of $0.004

 

On April 22, 2019, the Note Holders waived the event of default and extended the terms of the note until July 31, 2019. In consideration for the waiver and extension, the Note Holders received a 5% share of any potential recovery from the Arbitration. Such share was limited to $1 million. In connection with the announcement of the Award, the Company recorded an additional expense of $333,052, which was included in the arbitration related fees in the statement of operations for the year ended December 31, 2019.

 

On December 31, 2019, the Note Holders notified the Company of their election to convert the Promissory Note into Common Stock. As a result, the Note Holders received 86,927,397 shares of Common Stock on December 31, 2019.

 

$200,000 Additional Promissory Note

 

Additionally, on April 22, 2019 the Company issued the Additional Promissory Note in the amount of $200,000 to the Note Holders for funds advanced to the Company. The Additional Promissory Note was approved by the Board on August 1, 2018. Funds were advanced to the Company from August 1, 2018 through March 13, 2019. The Additional Promissory Note was executed on April 22, 2019 by the Company. The Additional Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Additional Promissory Note into Series D Preferred Stock of the Company at a conversion price based upon the price of the Company’s common stock on the date of advancement of the loan amount (the “Conversion Price”). Because the loan proceeds were advanced on multiple dates, the Conversion Price varies depending upon the price of the Company’s common stock on the date of advancement of the loan amount. The Optional Conversion is solely at the Note Holders’ discretion.

 

On December 31, 2019, the Note Holders notified the Company of their election to convert the Additional Promissory Note into Series D Preferred Stock. As a result, the Note Holders received 20,991,891 shares of Series D Preferred Stock on February 10, 2020.

 

Additionally, the Note Holders retain two warrants to purchase Common Stock of the Company for each share of Preferred Stock held and the price of each warrant is equal to the Conversion Price. Each warrant shall expire on July 31, 2029. These additional warrants account for 41,983,781 shares at an average weighted Conversion Price of $0.029.

 

All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.

 

Note I – COMMITMENTS AND CONTINGENCIES

 

Operating Lease

 

The Company does not own any real property.  The Company leases approximately 600 square feet of office space in Atlanta, Georgia, pursuant to a short-term lease as of August 2019. The Company currently pays base rent in the amount of $2,539 per month. The Company also leases approximately 400 square feet of office space in Berwyn, Pennsylvania, pursuant to a short-term lease as of November 2019. The Company currently pays base rent in the amount of $1,078 per month.

 

 8

 

 

HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited), continued

 

Note I – COMMITMENTS AND CONTINGENCIES, continued

 

Legal Proceedings

 

The Company received notification that the United States Patent and Trademark Office (“USPTO”) had declared an Interference between Health Discovery Corporation’s pending patent application covering SVM-Recursive Feature Elimination (“SVM-RFE”) and Intel Corporation’s Patent No. 7,685,077, entitled “Recursive Feature Eliminating Method based on a Support Vector Machine”. Prior to 2013, when the America Invents Act (AIA) was enacted, a patent would be awarded to the “first to invent” a claimed invention. An Interference is an administrative proceeding within the USPTO that is used to determine which party was the first to invent an invention that is claimed in two (or more) independently owned patent applications.

 

On February 27, 2019, the USPTO ruled in favor of the Company on the SVM-RFE Patents in the Interference proceeding between the Company and Intel Corporation. The Patent Trial and Appeal Board (“PTAB”) of the USPTO issued its decision, finding that the Company is entitled to claim exclusive rights to the SVM-RFE technology as set forth in the pending patent application that was filed to provoke the Interference. The decision, issued by Administrative Patent Judge James Moore, ordered Intel’s patent to be cancelled. The decision also dismissed Intel’s motions challenging the validity of the Company’s pending claims and issued patents covering SVM-RFE. The Company is currently evaluating its options for further action regarding this matter.

 

On February 7, 2020, two shareholders of the Company, William F. Quirk, Jr. (“Quirk”) and Cindy Bear (“Bear”), filed a motion for a temporary restraining order and preliminary injunction in DeKalb County Superior Court. Among the items in the motion, Quirk and Bear requested to have a special meeting of the shareholders and Quirk and Bear alleged misconduct by the Company and its directors.

 

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Notes to Financial Statements (unaudited), continued

 

Note I – COMMITMENTS AND CONTINGENCIES, continued

 

On March 2, 2020, having received no relief, Quirk and Bear dismissed their action in DeKalb County and filed a new lawsuit in Fulton County Superior Court based on substantially similar allegations and seeking similar relief. On March 4, 2020, the Fulton County court ordered a hearing on the emergency motion for a temporary restraining order against the Company for the following day.

 

At the hearing on March 5, 2020, Quirk and Bear presented their version of the facts through affidavits submitted by both Quirk and Bear, arguing that the affidavits supported the emergency relief they sought. The judge denied the motion and did not enter a temporary restraining order. The court set an evidentiary hearing on Quirk and Bear’s motion for a preliminary injunction for March 27, 2020. This hearing was postponed due to the COVID-19 pandemic.

 

On May 5, 2020, Fox Rothschild LLP moved to withdraw as counsel for Quirk and Bear abruptly and without notice. On May 13, 2020, the Court entered an order granting the law firm’s withdrawal as counsel. As of May 13, 2020, Quirk and Bear are representing themselves pro se.

 

On June 18, 2020, the Company was successful in its motion to transfer this action to the Business Division of Fulton County.

 

Quirk and Bear filed this suit after attempting to call a special meeting of shareholders and making a demand for inspection of certain books and records. The Company determined the demand for a special meeting was defective for a number of reasons, but as the Company previously announced and subsequently completed, the Company held its annual meeting after the Company filed its annual report on Form 10-K. The Company has provided counsel for Quirk and Bear with the records to which Quirk and Bear were legally entitled.

 

The Company denies all allegations of improper conduct in the complaint and will continue to defend itself against all allegations.  As a result, the Company has recognized expenses totaling $152,000 for the period ended March 31, 2020 related to legal fees associated with this litigation. Although the Company believes that it will ultimately be successful in its defense, there can be no assurance that the Company will be successful in its defense. Should Quirk and Bear be successful, the outcome could have a material adverse effect on the Company.

 

The Company will continue to refute the baseless claims brought by Quirk and Bear, and is evaluating its rights including, but not limited to, recoupment from Quirk and Bear of the Company’s attorneys’ fees and costs incurred in doing so.

 

In December 2019, a novel strain of coronavirusCOVID-19, was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States, and efforts to contain the spread of COVID-19 have intensified. The outbreak of COVID-19 has evolved into a global pandemic. The coronavirus has spread to many regions of the world, including the areas of the United States where we operate. At this time, the United States and certain other countries are the subject of lockdowns and self-isolation procedures, which have significantly limited business operations and restricted internal and external meetings. Further, the outbreak and any preventative or protective actions that we or our customers may take in respect of COVID-19 may result in a period of disruption to our work in progress.

 

Should the coronavirus continue to spread, our business operations could be delayed or interrupted. For instance, our executive officers or directors may become infected with the virus and become unable to fulfill their duties. We are taking precautionary steps to protect our executive officers consistent with White House guidance and state and local orders. 

 

The intense focus on COVID-19 also has led to the suspension of clinical trials and research projects relating to other conditions, which may impact our ability to form new contractual arrangements to exploit our technology. While the potential economic impact brought by and the duration of the pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption of global financial markets, which may reduce our ability to access capital either at all or on favorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common stock.

 

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Notes to Financial Statements (unaudited), continued

 

Note I – COMMITMENTS AND CONTINGENCIES, continued

 

The ultimate impact of the current pandemic, or any other health epidemic, is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, or the economy as a whole. However, these effects could have a material impact on our operations, and we will continue to monitor the situation closely.

 

Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business and financial condition. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.

 

Note J – FINANCIAL CONDITION AND GOING CONCERN

 

The Company has prepared its financial statements on a “going concern” basis, which presumes that it will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.

 

The Company’s ability to continue as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining additional financing and successfully bringing the Company’s technologies to the market.  The outcome of these matters cannot be predicted at this time.  The Company’s financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should the Company be unable to continue in business.

 

If the going concern assumption was not appropriate for the Company’s financial statements then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.  Such adjustments may be material. 

 

At March 31, 2020, the Company had $2.16 million cash on hand. As a result, the Company estimates cash will be depleted by the second quarter of 2023 if the Company does not generate sufficient cash to support operations.

 

The Company’s plan to have sufficient cash to support operations is comprised of generating revenue through providing services related to those patents, pursuing infringement opportunities and obtaining additional equity or debt financing.

 

The Company believes the funds received from the NeoGenomics arbitration award will allow the Company to maintain operations until second quarter 2023. While the Company believes these efforts should increase the value of the Company, there is no guarantee the Company will be successful in these efforts.

 

Note K – RECENT ACCOUNTING PRONOUNCEMENTS

 

On August 28, 2018, the Financial Accounting Standards Board issued a new standard, ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, “Fair Value Measurement.” Certain requirements were removed such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, certain requirements were modified and certain disclosures were added such as the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. This standard will be effective for the Company on January 4, 2021. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows.

 

On December 18, 2019, the Financial Accounting Standards Board issued a new standard, ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This new guidance simplifies the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intra period tax allocation when there is a loss from continuing operations and income/gain from other items; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The new guidance also simplifies the accounting for income taxes under certain circumstances such as requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of a business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This standard will be effective for the Company on January 4, 2021. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows.

 

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HEALTH DISCOVERY CORPORATION

Notes to Financial Statements (unaudited), continued

 

Note L – REVENUE RECOGNITION

 

Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements.  These arrangements are generally governed by contracts that dictate responsibilities and payment terms.  The Company recognizes revenues as they are earned over the duration of a license agreement once all contractual obligations have been fulfilled.  If a license agreement has an undetermined or unlimited life, the revenue is recognized over the remaining expected life of the patents. Revenue is recognized under development agreements in the period the services are performed.

 

Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five-step analysis: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step analysis to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Note M – SUBSEQUENT EVENTS

 

On May 27, 2020, the Company held its Annual Shareholder Meeting. One of the proposals presented by the Company in its proxy statement was an approval to amend the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 450,000,000 to 900,000,000 and to increase the number of authorized shares of preferred stock from 45,000,000 to 90,000,000. This proposal received a majority of votes and was therefore approved by the shareholders.

 

In connection with their election to the Company’s Board of Directors at the Annual Shareholder Meeting and in recognition of their continuing contributions to the Company, on June 1, 2020, the Company granted to Mr. William Fromholzer, Ms. Colleen Hutchinson, Mr. Ed Morrison, and Mr. James Murphy each a one-time cash payment of $20,000 as well as an option to purchase 3,000,000 shares of the Company’s common stock. Additionally, the Company granted to Mr. George McGovern and Mr. Marty Delmonte each an option to purchase 5,000,000 shares and 4,500,000, respectively, of the Company’s common stock. Furthermore, the Company agreed to increase Mr. Delmonte’s salary by $25,000 to $150,000. These option grants are consistent with what has been granted to other board members and management of the Company. The options immediately vest, have an exercise price of $0.0138 and expire on June 1, 2030. The exercise price is based upon the closing price of the Company’s common stock on the date of the option grant. The fair value of each option granted is $0.0125 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.84%, an expected life of 5 years, and volatility of 147%. The aggregate computed value of these options is $268,078, and this amount will be charged as an expense during the second quarter of 2020.

 

Additionally, on June 1, 2020, Mr. McGovern and the Company have agreed to satisfy the accrued wages for Mr. McGovern. Mr. McGovern will forfeit his accrued wages for the following considerations. The Company’s Board of Directors approved the conversion of up to fifty percent of Mr. McGovern’s accrued wages as of December 31, 2019 into common stock and the remaining balance will be converted into a note payable to Mr. McGovern. The conversion of the accrued wages and the convertible features of the note payable will convert into common stock of the Company and will have a conversion price of the $0.0138. The conversion price is based upon the closing price of the Company’s common stock on June 1, 2020.

 

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HEALTH DISCOVERY CORPORATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Corporate Overview

 

Our Company is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable. The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery. The terms artificial intelligence and machine learning are sometimes used to describe pattern recognition tools.

 

HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.

 

Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that play a role in developing more personalized approaches to the diagnosis and treatment of certain diseases. However, our SVM assets in particular have broad applicability in many other fields. Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.

 

Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called SVM, as well as biomarkers that we discovered by applying our SVM techniques to complex genetic and proteomic data. Biomarkers are biological indicators or genetic expression signatures of certain disease states. Our intellectual property is protected by 32 patents that have been issued or are currently pending around the world.

 

Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities. In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies. Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop diagnostic and prognostic predictive tests; licensing of the SVM technologies directly to diagnostic companies; and, the potential formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.

 

NeoGenomics License

 

As previously disclosed in January 2017, the Company notified NeoGenomics (“NEO”) of HDC’s election to terminate all licenses that are subject to the Master License Agreement (the “MLA”) dated January 6, 2012, between the Company and NeoGenomics. The MLA was filed with the SEC on January 11, 2012 as an exhibit to a Current Report on Form 8-K. Subsequently, HDC and NeoGenomics attempted to resolve the matter through alternative dispute resolution, including but not limited to, mediation. While these efforts were unsuccessful, the Company ultimately filed a Demand for Arbitration with the American Arbitration Association’s Panel of Arbitrators (the “Panel”). On April 25, 2019, the Panel issued their Final Award. Section XXI, the Conclusion of the Final Award, stated:

 

Based on the foregoing, the Panel concludes as follows:

1. Effective immediately, the MLA is terminated.
2. HDC is awarded $1,500,000 based on the Panel’s conclusion that SmartFlow infringes a Valid Patent Claim and internal use by NEO is subject to Milestone and Royalty payments.
3. HDC is awarded $5,100,000 based on the Panel’s conclusion that NEO failed to use its best efforts with respect to the development and commercialization of SVM-CYTO.
4. Pursuant to Section 12.2 of the MLA, NEO shall reimburse HDC $8,694.
5. As discussed in this Final Award, all other claims by HDC are hereby denied.
6. NEO’s request for a Declaratory Judgment is denied.
7. All of NEO’s counterclaims are denied.
8. All other claims, counterclaims, defenses, requests for relief, to the extent not specifically addressed in this Final Award are hereby denied.

 

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HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

 

Therefore, the sum award for HDC is $6,608,694 plus interest accrued from date of the Final Award to date of payment. Additionally, the Panel holds that the MLA is terminated with the exception of the obligations expressly stated in Section 8.2. Section 8.2 of the MLA requires NeoGenomics to, among other things; continue its obligations to make payment of any sum due to HDC pursuant to Article 3 of the MLA, License Fees and Royalty Payments.

 

All NeoGenomics stock held by Health Discovery Corporation was sold during the period of 2013 through August 2017.

 

Intel Matter

 

As previously disclosed in September 2016, the USPTO had declared an Interference between the Company’s SVM-RFE Patent application and Intel Corporation’s Patent No. 7,685,077, entitled “Recursive Feature Eliminating Method based on a Support Vector Machine”.   The Interference was an administrative proceeding within the USPTO used to determine which party was the first to invent an invention that was claimed in two (or more) independently owned patent applications.   Subsequently, on February 27, 2019, the USPTO ruled in favor of Health Discovery Corporation on the SVM-RFE Patent application. The PTAB of the USPTO issued its decision, finding that Health Discovery Corporation is entitled to claim exclusive ownership rights to the SVM-RFE technology as set forth in the SVM-RFE Patent application that was filed to provoke the Interference.  The decision ordered Intel Corporation’s Patent No. 7,685,077 to be cancelled.  The decision also dismissed Intel Corporation’s motions challenging the validity of Health Discovery Corporation’s pending claims and issued patents covering SVM-RFE. 

 

In September 2019, the USPTO issued U.S. Patent No. 10,402,685 (“SVM-RFE Patent”) for Health Discovery Corporation’s patent application covering SVM-RFE.  Health Discovery Corporation now owns four patents in the United States and five international patents related to SVM-RFE and is the sole owner of all patents related to SVM-RFE. Furthermore, the USPTO, granted a Patent Term Adjustment (“PTA”) to the SVM-RFE Patent. The PTA is 1,785 days (almost 5 years), which is added to the normal 20-year-from-filing patent term. The USPTO granted this adjustment to offset delays that occurred within the USPTO during the examination process and interference proceedings.  This means the SVM-RFE Patent term has been extended from August 7, 2020 to June 7, 2025. 

 

As a result of the issuance of the SVM-RFE Patent, Health Discovery Corporation now has the right to exclude others from developing, commercializing or licensing this patented technology without the uncertainty of the Interference or concerns over the ownership of the all SVM-RFE patents. Additionally, Health Discovery Corporation is taking the necessary steps to protect its sole ownership of SVM-RFE patents against infringement.

 

Intellectual Property Developments

 

As previously disclosed, the Company submitted Patent Application Number 14/754,434 (the “Patent”) to the United States Patent and Trademark Office (“USPTO”).

 

The Company subsequently announced that the USPTO has issued a Notice of Allowance of this Patent covering the four-gene prostate cancer test developed using its proprietary SVM-RFE technology.  The allowed claims cover a method for screening for and treating prostate cancer by measuring expression levels of the four genes within a patient sample compared to one or more reference genes and generating a prediction score based on the averaged relative expression levels.  This Notice of Allowance is important after encountering the significant barriers to patenting of biomarkers that had been raised by the U.S. Supreme Court’s controversial decisions in Mayo Collaborative Services v. Prometheus Laboratories and Association for Molecular Pathology v. Myriad Genetics.   This Patent complements the Company’s already issued European Patent that covers similar claims. 

 

The Company believes that this Patent demonstrates the ability of the Company’s proprietary technology in the discovery and validation of biomarkers for diseases. The Company believes this same method can be applied to numerous different diseases and will explore opportunities with partners to deploy these same methods using its proprietary technology in biomarker discovery.

 

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HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

 

The Company now holds the exclusive rights to 31 issued U.S. patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets. The Company also has 1 pending U.S. patent application covering uses of the SVM technology as well as diagnostic methods that have been discovered using the SVM technology. The reduction in the total number of issued and pending patents since 2015 resulted from the Company’s decision to allow certain foreign patents issued and/or filed in countries that were deemed to have lower strategic value to lapse. In addition, a few U.S. patents that were either near the ends of their terms and/or had parallel applications with broader claims in force were allowed to expire. In addition, significant changes in the U.S. Patent Laws relating to the eligibility of certain subject matter for patent protection influenced the Company’s decision to abandon a few of its pending U.S. applications. This in turn reduced the Company’s total expenses for patent maintenance.

 

SVM Capital, LLC

 

In January 2007, SVM Capital, LLC (“SVM Capital”) was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques.  

 

On June 16, 2015, SVM Capital joined Manifold Partners, LLC (“Manifold Partners”) as a partner. Manifold Partners is a San Francisco-based multi-strategy portfolio management firm specializing in quantitative investment methodologies. As a part of the partnership, SVM Capital was to contribute their proprietary service to the collaboration with Manifold Partners. This technology is an outgrowth of the machine learning techniques created by the Company.

 

The management of SVM Capital, LLC has not provided Health Discovery Corporation with any updates since September 2016. Health Discovery Corporation is evaluating its rights regarding the license agreement with SVM Capital, LLC.

 

Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019

 

Revenue

 

For the three months ended March 31, 2020, revenue was $0 compared with $10,847 for the three months ended March 31, 2019. The revenue earned during the first quarter in 2019 was related to the revenue recognition of the Vermillion settlement.

 

Operating and Other Expenses

 

Amortization expense was $0 for the three months ended March 31, 2020 compared to $65,680 for the three months ended March 31, 2019. Amortization expense relates exclusively to the costs associated with filing patent applications and acquiring rights to the patents.

 

Professional and consulting fees totaled $24,672 for the three months ended March 31, 2020, compared with $2,133 for the same 2019 period. These fees consist primarily of patent filing and maintenance costs, professional fees, and accounting fees. The increase was due to higher accounting fees related to bringing the Company financial filings current.

 

Legal fees increased with fees totaling $152,170 during the three months ended March 31, 2020 and $6,474 during the same period in 2019. The increase was related to the accrual of legal costs related to the lawsuit brought by Quirk and Bear.

 

Compensation expense of $106,114 for the three months ended March 31, 2020 was higher than the $73,318 reported for the comparable 2019 period. The increase is attributed to costs related to higher employee salaries.

 

Other general and administrative expense increased to $39,425 for the three months ended March 31, 2020, compared to $30,121, for the same period in 2019. This increase was due to expenses related to the increase of rent expense for the Company. 

 

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HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

 

Loss from Operations

 

The loss from operations for the three months ended March 31, 2020 was $322,381, compared to $166,879 for the three months ended March 31, 2019. The increase was due to an increase in expenses as described above and particularly the Quirk and Bear lawsuit.

 

Other Income and Expense

 

Because the Company issued warrants exceeding the number of common shares available if the holders exercised the previously issued outstanding options and warrants, the Company has recorded an increase in the common stock warrant liability of $1,194,097 during the three-month period ended March 31, 2020.

 

Net Loss

 

The net loss for the three months ended March 31, 2020 was $1,516,044 compared to net loss of $176,879 for the three months ended March 31, 2019. The increase was due primarily to the Quirk and Bear lawsuit and the increase in common stock warrant liability.

 

Loss per share was $0.0039 for the three-month period ended March 31, 2020 compared to loss per share of $0.0007 for the quarterly period ended March 31, 2019.

 

Liquidity and Capital Resources

 

At March 31, 2020, the Company had $2.16 million in cash and total current liabilities of $3.94 million. The primary amount of current liabilities relates to $3.10 million in common stock warrant liability and $152,000 in accrued liabilities. The Company is pursuing licensing activity and collaborations to increase revenue. Additionally, the Company is evaluating options to secure funding for infringement activities to protect its proprietary technology or other forms of fund raising either in the debt or equity markets. None of these options are definitive and there is no guarantee the Company will be successful in these fund-raising efforts. The Company estimates cash will be depleted by the second quarter of 2023 unless the Company is able to increase revenues or raise additional capital.

 

At March 31, 2020, the Company had no contractual obligations that require disclosure.

 

The Company has relied primarily on equity and debt financing for liquidity. The Company produced sales, licensing, and developmental revenue starting in late 2005 and must increase revenues in order to generate sufficient cash to continue operations. The Company’s plan to have sufficient cash to support operations is comprised of generating revenue through licensing its patent portfolio, providing services related to those patents, protecting its proprietary technology against infringers and obtaining additional equity or debt financing. Current management is utilizing cash resources to explore future opportunities for the Company. Additionally, proceeds from arbitration in 2019 increased cash balances and are being utilized to further its business objectives.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.

 

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HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

 

Forward-Looking Statements

 

This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 12E of the Securities Exchange Act of 1934, including or related to our future results, certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this Report, the words “estimate,” “project,” “intend,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this Report, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objective or other plans. The forward-looking statements contained in this Report speak only as of the date of this Report as stated on the front cover, and we have no obligation to update publicly or revise any of these forward-looking statements. These and other statements which are not historical facts are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, the failure to successfully develop a profitable business, delays in identifying customers, and the inability to retain a significant number of customers, as well as the risks and uncertainties described in “Risk Factors” section to our Annual Report for the fiscal year ended December 31, 2019.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable.

 

Item 4. Controls and Procedures

 

As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, who is also serving as our Principal Executive Officer and our President who is also serving as our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Chief Executive Officer and President concluded that, as of the Evaluation Date, because of the Company’s internal control weakness, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer and President, as appropriate to allow timely decisions regarding required disclosure.

 

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

 

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  As of the Evaluation Date, no changes in the Company’s internal control over financial reporting occurred that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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HEALTH DISCOVERY CORPORATION

Management’s Discussion and Analysis, continued

 

Our Annual Report on Form 10-K contains information regarding a material weakness in our internal control over financial reporting as of December 31, 2019 because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.

 

In light of the conclusion that our internal disclosure controls were ineffective as of March 31, 2020, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regard to this quarterly report. Accordingly, the Company believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this quarterly report.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On February 7, 2020, two shareholders of the Company, Quirk and Bear, filed a motion for a temporary restraining order and preliminary injunction in DeKalb County Superior Court. Among the items in the motion, Quirk and Bear requested to have a special meeting of the shareholders and Quirk and Bear alleged misconduct by the Company and its directors.

 

On March 2, 2020, having received no relief, Quirk and Bear dismissed their action in DeKalb County and filed a new lawsuit in Fulton County Superior Court based on substantially similar allegations and seeking similar relief. On March 4, 2020, the Fulton County court ordered a hearing on the emergency motion for a temporary restraining order against the Company for the following day.

 

At the hearing on March 5, 2020, Quirk and Bear presented their version of the facts through affidavits submitted by both Quirk and Bear, arguing that the affidavits supported the emergency relief they sought. The judge denied the motion and did not enter a temporary restraining order. The court set an evidentiary hearing on Quirk and Bear’s motion for a preliminary injunction for March 27, 2020. This hearing was postponed due to the COVID-19 pandemic.

 

On May 5, 2020, Fox Rothschild LLP moved to withdraw as counsel for Quirk and Bear abruptly and without notice. On May 13, 2020, the Court entered an order granting the law firm’s withdrawal as counsel. As of May 13, 2020, Quirk and Bear are representing themselves pro se.

 

On June 18, 2020, the Company was successful in its motion to transfer this action to the Business Division of Fulton County.

 

Quirk and Bear filed this suit after attempting to call a special meeting of shareholders and making a demand for inspection of certain books and records. The Company determined the demand for a special meeting was defective for a number of reasons, but as the Company previously announced and subsequently completed, the Company held its annual meeting after the Company filed its annual report on Form 10-K. The Company has provided counsel for Quirk and Bear with the records to which Quirk and Bear were legally entitled.

 

The Company denies all allegations of improper conduct in the complaint and will continue to defend itself against all allegations.  As a result, the Company has recognized expenses totaling $152,000 for the period ended March 31, 2020 related to legal fees associated with this litigation. Although the Company believes that it will ultimately be successful in its defense, there can be no assurance that the Company will be successful in its defense. Should Quirk and Bear be successful, the outcome could have a material adverse effect on the Company.

 

The Company will continue to refute the baseless claims brought by Quirk and Bear, and is evaluating its rights including, but not limited to, recoupment from Quirk and Bear of the Company’s attorneys’ fees and costs incurred in doing so.

 

 18

 

 

HEALTH DISCOVERY CORPORATION

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

In the fourth quarter of 2013, the Board of Directors authorized the issuance of Series C Preferred Shares in private placement transactions. The Series C Preferred Shares were fully subscribed in the third quarter 2015. The Company received total net proceeds of $900,000. The Series C Preferred Shares are accompanied by $0.03 warrants and $0.03 contingency warrants. The warrant holders must exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.20 for a period of thirty consecutive calendar days.  The holders must also exercise fifty percent of the warrants if the market price for the Company’s common stock is $0.30 for a period of thirty consecutive calendar days.  The warrants were valued at $0.022 each using the Black Scholes Method.

 

During the period ended March 31, 2019, the Series C Preferred Stock was converted to common stock of the Company.

 

On April 22, 2019 the Company issued a convertible promissory note (the “Additional Promissory Note”) in the amount of $200,000 to the Note Holders for funds advanced to the Company. The Additional Promissory Note was approved by the Board on August 1, 2018. Funds were advanced to the Company from August 1, 2018 through March 13, 2019. The Additional Promissory Note was executed on April 22, 2019 by the Company. The Additional Promissory Note contained an 8% annual interest rate and the Note Holders had the right to convert the principal and unpaid accrued interest of the Additional Promissory Note into Series D Preferred Stock (“Preferred Stock”) of the Company at a conversion price based upon the price of the Company’s common stock on the date of advancement of the loan amount (the “Conversion Price”). Because the loan proceeds were advanced on multiple dates, the Conversion Price varies depending upon the price of the Company’s common stock on the date of advancement of the loan amount. The right of conversion (“Optional Conversion”) is solely at the Note Holders’ discretion.

 

On December 31, 2019, the Note Holders notified the Company of their election to convert the Additional Promissory Note into Series D Preferred Stock. As a result, the Note Holders received 20,991,891 shares of Series D Preferred Stock on February 10, 2020.

 

Additionally, the Note Holders retain two warrants to purchase common stock of the Company for each share of Preferred Stock held and the price of each warrant is equal to the Conversion Price. Each warrant shall expire on July 31, 2029. These additional warrants account for 41,983,781 shares at an average weighted price of $0.029.

 

All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.

 

 19

 

 

HEALTH DISCOVERY CORPORATION

 

Item 3.   Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information

 

On May 27, 2020, the Company held its Annual Shareholder Meeting. One of the proposals presented by the Company in its proxy statement was an approval to amend the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 450,000,000 to 900,000,000 and to increase the number of authorized shares of preferred stock from 45,000,000 to 90,000,000. This proposal received a majority of votes.

 

In connection with their election to the Company’s Board of Directors at the Annual Shareholder Meeting and in recognition of their continuing contributions to the Company, on June 1, 2020, the Company granted to Mr. William Fromholzer, Ms. Colleen Hutchinson, Mr. Ed Morrison, and Mr. James Murphy each a one-time cash payment of $20,000 as well as an option to purchase 3,000,000 shares of the Company’s common stock. Additionally, the Company granted to Mr. George McGovern and Mr. Marty Delmonte each an option to purchase 5,000,000 shares and 4,500,000, respectively, of the Company’s common stock. Furthermore, the Company agreed to increase Mr. Delmonte’s salary by $25,000 to $150,000. These option grants are consistent with what has been granted to other board members and management of the Company. The options immediately vest, have an exercise price of $0.0138 and expire on June 1, 2030. The exercise price is based upon the closing price of the Company’s common stock on the date of the option grant. The fair value of each option granted is $0.0125 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.84%, an expected life of 5 years, and volatility of 147%. The aggregate computed value of these options is $268,078, and this amount will be charged as an expense during the second quarter of 2020.

 

Additionally, on June 1, 2020, Mr. McGovern and the Company have agreed to satisfy the accrued wages for Mr. McGovern. Mr. McGovern will forfeit his accrued wages for the following considerations. The Company’s Board of Directors approved the conversion of up to fifty percent of Mr. McGovern’s accrued wages as of December 31, 2019 into common stock and the remaining balance will be converted into a note payable to Mr. McGovern. The conversion of the accrued wages and the convertible features of the note payable will convert into common stock of the Company and will have a conversion price of the $0.0138. The conversion price is based upon the closing price of the Company’s common stock on June 1, 2020.

 

Item 6.    Exhibits

 

The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(a) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-Q:

 

31.1 Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer, Principal Executive Officer and President, Principal Financial Officer. Filed herewith.

 

32.1 Section 1350 Certification of Chief Executive Officer, Principal Executive Officer and President, Principal Financial Officer. Filed herewith.

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase

 

101.DEF XBRL Taxonomy Extension Definition Linkbase

 

101.LAB XBRL Taxonomy Extension Label Linkbase

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  HEALTH DISCOVERY CORPORATION
  Registrant
   
Date: June 30, 2020 By: /s/ George H. McGovern, III
  George H. McGovern, III
  Chairman, Chief Executive Officer, Principal Executive Officer

 

Date: June 30, 2020 By: /s/ Marty Delmonte
  Marty Delmonte
  President, Chief Operating Officer, Principal Financial Officer

 

 20

 

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